Nonpartisan research group lists NC as having seventh-worst business climate

By McClatchy News Service

Published: Thursday, October 10, 2013 at 11:38 AM.

John H. Boyd, a principal in The Boyd Co. Inc., a site-location consulting company in New Jersey, has said the corporate income tax is overshadowed as an economic driver by labor costs, utility rates, local property tax rates, North Carolina’s right-to-work status and transportation infrastructure.

The Tax Foundation took to task legislatures that rely, if not depend, on large economic incentive packages to attract corporate expansions and new investments.

“Lawmakers create these deals under the banner of job creation and economic development, but the truth is that if a state needs to offer such packages, it is most likely covering for a woeful business tax climate,” The Tax Foundation said.

“In reality, tax-induced economic distortions are a fact of life, so a more realistic goal is to maximize the occasions when businesses and individuals are guided by business principles and minimize those cases where economic decisions are influenced, micromanaged or even dictated by a tax system.

“The more riddled a tax system is with politically motivated preferences, the less likely it is that business decisions will be made in response to market forces. The index rewards those states that apply these principles.”

Another research group has stirred further the muddy waters of comparing state economic competitiveness with a report listing North Carolina as having the seventh-worst tax business climate.

The Tax Foundation, a nonpartisan Washington think tank, said the bottom 10 states have in common “the same afflictions: complex, non-neutral taxes with comparatively high rates.”

The group’s overall ranking are based in five tax categories: corporate, individual income, sales, unemployment insurance and property.

North Carolina’s best ranking was seventh in unemployment tax, while its worst ranking was 47th for sales tax. It also ranked 29th in corporate tax, 30th in property tax and 42nd in individual income.

According to The Tax Foundation, there’s hope for significant improvement in North Carolina’s ranking based on tax reform measures approved by the General Assembly this year.

By comparison, Site Selection magazine has ranked North Carolina first in the nation for business climate in 10 of the last 12 years, including in 2012. Forbes, CNBC and the Business Facilities also have continuously ranked North Carolina’s business climate among the nation’s best.

Site Selection’s rankings are determined 50 percent based on five criteria: three that require states to demonstrate a strong record of attracting capital investment, as well as the Tax Foundation and KPMG's Location Matters analysis of state tax burdens on existing and new companies. The other 50 percent is based on a survey of business executives, which ranked North Carolina second behind Texas.

Mark Arend, the magazine’s editor-in-chief, said in November 2012 that North Carolina regained the top ranking from Texas based on the combination of work-force availability and skill sets of interest to employers, proactive business-development agencies, logistics assets and higher education infrastructure.

All are attributes that N.C. Gov. Pat McCrory has praised in the past week during economic-development project announcements in Davidson and Davie counties.

However, McCrory also stressed it was critical to the state’s business climate that the Republican-led General Assembly reduced the corporate income tax rate from 6.9 percent to 5 percent in 2015, dropping it from the highest to the lowest in the Southeast. The rate could drop as low as 3 percent in 2017 if the state meets revenue targets that depend significantly on tax revenue increasing in a growing economy.

According to analysts, the corporate income tax touches a subset of businesses, namely C-corporations, which tend to be larger, multi-state companies with publicly traded shares. Analysts estimate the tax reduction could cost the state about $350 million in annual revenue.

The Tax Foundation said that as the tax reform goes into effect, North Carolina’s overall ranking could rise as high as 17th.

Democrats acknowledge North Carolina has faced a stiffer challenge in recruiting businesses and helping existing companies expand because of the economic downturn.

John Hood, president of the John Locke Foundation, a libertarian policy-research group in Raleigh, said that since North Carolina’s actual economic performance has lagged behind the regional and national averages the past 12 years, “that should tell you that the Site Selection ranking is not a good predictor of whether businesses will start, grow and employ people in a given state.”

John H. Boyd, a principal in The Boyd Co. Inc., a site-location consulting company in New Jersey, has said the corporate income tax is overshadowed as an economic driver by labor costs, utility rates, local property tax rates, North Carolina’s right-to-work status and transportation infrastructure.

The Tax Foundation took to task legislatures that rely, if not depend, on large economic incentive packages to attract corporate expansions and new investments.

“Lawmakers create these deals under the banner of job creation and economic development, but the truth is that if a state needs to offer such packages, it is most likely covering for a woeful business tax climate,” The Tax Foundation said.

“In reality, tax-induced economic distortions are a fact of life, so a more realistic goal is to maximize the occasions when businesses and individuals are guided by business principles and minimize those cases where economic decisions are influenced, micromanaged or even dictated by a tax system.

“The more riddled a tax system is with politically motivated preferences, the less likely it is that business decisions will be made in response to market forces. The index rewards those states that apply these principles.”